Thank you for quoting my comment on tariffs and responding to it. However, I remain unconvinced that all tariffs are bad - and this is why.
You write: "If the price of carrots rises above the original price, a price that American farmers were competing with before trade began, they are going to notice… and start planting carrots again!"
I do not know a lot about carrots, but let's allow that even if you had not planted carrots for 10-20 years, you can come back quickly and suddenly produce large quantities of world-class product. The thing is, in many industries these "comebacks" aren't possible.
Take car manufacturing. Say a factory that hasn't guilt cars in a decade sees nice margins and wishes to come back. Guess what?
• Economies of scale could take years to achieve, so margins could be low or negative for at least several years;
• Managers, engineers and technicians with an up-to-date skill set and experience may not be easy to find and hire;
• For non-commodity products, without any corporate brand strength, goodwill, enormous marketing, promotional and advertising budgets may be impossible to obtain - who will buy your Johnny-Comeback-From-Obscurity brands? RC cola may be good, but when was the last time you saw it anywhere without specifically searching for it?
• Beyond simply a corporate brand, there are country brands. We know who makes great stuff - Swiss watches, German cars, Italian fashion, Colombian coffee, Indian tea ring a bell. Would you buy a Colombian watch? Italian coffee (they do consume but do not really produce)? An Indian car? Once a country brand, perhaps better termed a "virtual franchise," is lost, it will be extremely difficult to get it back.
We talk a great deal about moats. Barriers to entry. They are a real thing. Companies who capture a market will want to build moats! It's not possible in all industries but is possible in many. Have you ever tried to compete against a well-entrenched incumbent? I have! It's an absolute bear.
Anyway, there's been a divergence between what an economists think should happen and what businesspeople know can happen. Economies of scale, brand recognition, regulatory compliance, virtual franchises, first mover advantage, switching costs, network effects, etc. - these things can keep a business in business and competitors at bay long after cost leadership has been lost or abandoned.
Tariffs attempt to prevent the advantages gained by dumping so that the other moats would not be built.
EDIT: forgot to add the market knowledge. That tends to become obsolete very quickly if one is not continuously workin in the field.
I think you make a good point about complex manufactured goods like cars - the long-run market entry conditions will be a lot different than carrots! Two reasons why goods that have high barriers to entry still don't need to be protected from dumping:
First, to my knowledge, the feared end result of high prices and no remaining domestic industry that began by dumping has never occurred. Do you know of an example where it has? Can you give a real-life example of a country where an industry a) received large government subsidies b) sold abroad below cost c) destroyed foreign competition d) increased prices and e) left foreigner consumers with high prices and no domestic option.
Second, say that a Nigerian firm can produce cars equivalent to their American counterparts at 80% of the price. According to fair trade proponents, if the reason the Nigerian cars are 80% of the American price is because of dumping, then the American government should put tariffs on Nigerian cars to prevent the end result described above. My question is, "Why does it matter why the cars are cheaper?" If it helps the American economy in the long-run to put tariffs on the artificially cheaper Nigerian cars, then it should also help the American economy to put tariffs on organically cheaper Nigerian cars, i.e. Nigerian cars that are 80% of the American price because of lower costs, not government subsidies. If tariffs are being put into place because foreign competition is cheaper, it's just good old protectionism.
"then it should also help the American economy to put tariffs on organically cheaper Nigerian cars" - Yes, it should.
"Can you give a real-life example of a country where an industry a) received large government subsidies b) sold abroad below cost c) destroyed foreign competition d) increased prices and e) left foreigner consumers with high prices and no domestic option."
I am going to include organically cheaper items because they are not that easy to separate from subsidized and often, a mix of these is at play.
The "no domestic option" outcome is where things begin to get nuanced. You can still find "domestic" products, meaning domestically branded, they are just more expensive and have a large percentage of parts that are made overseas. It's rarely an all or nothing phenomenon. But damage can be large and yet hidden. Take cars, for instance - even classically American brands like GM have many parts (or even the majority) made overseas. So portions of the value chain are lost, and sometimes, they are large.
Domestic computers like Dell and HP - who now makes motherboards and some other components?
Raytheon made the firth microwave - where are most of them made now?
Being in favor of tariffs just because foreign goods are cheaper is simple protectionism. Which is a position many people take, but it shouldn't be dressed up as being compatible with free trade.
You make a fair point about organically vs artificially cheaper foreign goods - without detailed industry data it's unreasonable to ask anyone to know what's happening.
However, your examples of cars, computers, and microwaves all fail condition (e) spectacularly. Computers and microwaves sell at a fraction of the price today, when most are imported, then they did when they were made domestically. Even cars, once you account for the increase in quality, are much cheaper now then they were in the 1960s. I'm currently driving a 16 year old imported car with 155,000 miles. Brand new that car sold for about 60% of the median salary of a full-time working American. It has AC, heated seats, nice sound system, and a high safety record. I can reasonably expect it will make it to 200,000 miles without becoming a money pit. That would be a fantasy for a worker in the 1980s, let alone the 1960s.
If you want to say protectionism is bad, no problem. That is a valid opinion. I won't argue with you then.
If you want to say that no tariffs = consumers are better off, it's more difficult because we do not know what would have happened if foreign industry did not take over the domestic market. Studying cases is only partially helpful because conditions are often not replicable from market to market. Also judgments are difficult because outcomes can take decades (or longer) to unfold. I still won't argue with you, but your logic would be on thin ice.
If you want to say that a country is better off without tariffs, you will have difficulty defending that view. With unmitigated market share grabs by foreign players, entire domestic industries can be lost, leading to total foreign domination. At that point, cost is no longer low, and if it is, the reason is scale and advanced development that could have also happened at home, had a particular industry survived there. Here is what Tim Cook had to say on the subject:
"There’s a confusion about China. The popular conception is that companies come to China because of low labor cost. I’m not sure what part of China they go to, but the truth is China stopped being the low-labor-cost country many years ago. And that is not the reason to come to China from a supply point of view. The reason is because of the skill, and the quantity of skill in one location and the type of skill it is.
The products we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state of the art. And the tooling skill is very deep here. In the U.S., you could have a meeting of tooling engineers and I’m not sure we could fill the room. In China, you could fill multiple football fields."
Consumers in the US may or may not be better off now, but think of all the people who could have had jobs building phones in the US. More jobs and job choices are better than fewer jobs and choices.
If you have doubts, one way of evaluating something is taking it to completion. What if nothing was made in the US - would we all be better off? Even if this resulted in abundance of cheap foreign goods, what would we do to earn the money to buy them?
Well the good news is we are about to find out who is right. If tariffs are good, the economy will grow quickly as manufacturers will start building factories and existing factories will start hiring more workers. The US economy will expand, prices will drop, and salaries will increase.
I'd love to see a definitive scenario play out, but likely you and I will both be right and wrong. If tariffs work as a negotiating tactic and are scaled back once better trade terms are secured, I'll be right. If negotiations fail and the tariffs were done incorrectly (they should probably be more measured and selective than the way they were just enacted), you will be right. If the tariffs were done more strategically, it would be a good thing either way...
Thinking about it some more... Yes, tariffs seem like a drag during peacetime. But... If you want peace, prepare for war. Tariffs are like an insurance for wartime - a country cannot have an effective war effort if, instead of reconfiguring or ramping up certain industries, it now has to build them from scratch.
So, certain industries vital to national security must be protected with tariffs and subsidies. Food production, heavy machinery, electronics, steel, chemical... To be ready for something inevitable in principle but uncertain in timing.
Thank you for quoting my comment on tariffs and responding to it. However, I remain unconvinced that all tariffs are bad - and this is why.
You write: "If the price of carrots rises above the original price, a price that American farmers were competing with before trade began, they are going to notice… and start planting carrots again!"
I do not know a lot about carrots, but let's allow that even if you had not planted carrots for 10-20 years, you can come back quickly and suddenly produce large quantities of world-class product. The thing is, in many industries these "comebacks" aren't possible.
Take car manufacturing. Say a factory that hasn't guilt cars in a decade sees nice margins and wishes to come back. Guess what?
• Economies of scale could take years to achieve, so margins could be low or negative for at least several years;
• Managers, engineers and technicians with an up-to-date skill set and experience may not be easy to find and hire;
• For non-commodity products, without any corporate brand strength, goodwill, enormous marketing, promotional and advertising budgets may be impossible to obtain - who will buy your Johnny-Comeback-From-Obscurity brands? RC cola may be good, but when was the last time you saw it anywhere without specifically searching for it?
• Beyond simply a corporate brand, there are country brands. We know who makes great stuff - Swiss watches, German cars, Italian fashion, Colombian coffee, Indian tea ring a bell. Would you buy a Colombian watch? Italian coffee (they do consume but do not really produce)? An Indian car? Once a country brand, perhaps better termed a "virtual franchise," is lost, it will be extremely difficult to get it back.
We talk a great deal about moats. Barriers to entry. They are a real thing. Companies who capture a market will want to build moats! It's not possible in all industries but is possible in many. Have you ever tried to compete against a well-entrenched incumbent? I have! It's an absolute bear.
Anyway, there's been a divergence between what an economists think should happen and what businesspeople know can happen. Economies of scale, brand recognition, regulatory compliance, virtual franchises, first mover advantage, switching costs, network effects, etc. - these things can keep a business in business and competitors at bay long after cost leadership has been lost or abandoned.
Tariffs attempt to prevent the advantages gained by dumping so that the other moats would not be built.
EDIT: forgot to add the market knowledge. That tends to become obsolete very quickly if one is not continuously workin in the field.
I think you make a good point about complex manufactured goods like cars - the long-run market entry conditions will be a lot different than carrots! Two reasons why goods that have high barriers to entry still don't need to be protected from dumping:
First, to my knowledge, the feared end result of high prices and no remaining domestic industry that began by dumping has never occurred. Do you know of an example where it has? Can you give a real-life example of a country where an industry a) received large government subsidies b) sold abroad below cost c) destroyed foreign competition d) increased prices and e) left foreigner consumers with high prices and no domestic option.
Second, say that a Nigerian firm can produce cars equivalent to their American counterparts at 80% of the price. According to fair trade proponents, if the reason the Nigerian cars are 80% of the American price is because of dumping, then the American government should put tariffs on Nigerian cars to prevent the end result described above. My question is, "Why does it matter why the cars are cheaper?" If it helps the American economy in the long-run to put tariffs on the artificially cheaper Nigerian cars, then it should also help the American economy to put tariffs on organically cheaper Nigerian cars, i.e. Nigerian cars that are 80% of the American price because of lower costs, not government subsidies. If tariffs are being put into place because foreign competition is cheaper, it's just good old protectionism.
"then it should also help the American economy to put tariffs on organically cheaper Nigerian cars" - Yes, it should.
"Can you give a real-life example of a country where an industry a) received large government subsidies b) sold abroad below cost c) destroyed foreign competition d) increased prices and e) left foreigner consumers with high prices and no domestic option."
I am going to include organically cheaper items because they are not that easy to separate from subsidized and often, a mix of these is at play.
The "no domestic option" outcome is where things begin to get nuanced. You can still find "domestic" products, meaning domestically branded, they are just more expensive and have a large percentage of parts that are made overseas. It's rarely an all or nothing phenomenon. But damage can be large and yet hidden. Take cars, for instance - even classically American brands like GM have many parts (or even the majority) made overseas. So portions of the value chain are lost, and sometimes, they are large.
Domestic computers like Dell and HP - who now makes motherboards and some other components?
Raytheon made the firth microwave - where are most of them made now?
There are other examples, we just have to look.
Being in favor of tariffs just because foreign goods are cheaper is simple protectionism. Which is a position many people take, but it shouldn't be dressed up as being compatible with free trade.
You make a fair point about organically vs artificially cheaper foreign goods - without detailed industry data it's unreasonable to ask anyone to know what's happening.
However, your examples of cars, computers, and microwaves all fail condition (e) spectacularly. Computers and microwaves sell at a fraction of the price today, when most are imported, then they did when they were made domestically. Even cars, once you account for the increase in quality, are much cheaper now then they were in the 1960s. I'm currently driving a 16 year old imported car with 155,000 miles. Brand new that car sold for about 60% of the median salary of a full-time working American. It has AC, heated seats, nice sound system, and a high safety record. I can reasonably expect it will make it to 200,000 miles without becoming a money pit. That would be a fantasy for a worker in the 1980s, let alone the 1960s.
If you want to say protectionism is bad, no problem. That is a valid opinion. I won't argue with you then.
If you want to say that no tariffs = consumers are better off, it's more difficult because we do not know what would have happened if foreign industry did not take over the domestic market. Studying cases is only partially helpful because conditions are often not replicable from market to market. Also judgments are difficult because outcomes can take decades (or longer) to unfold. I still won't argue with you, but your logic would be on thin ice.
If you want to say that a country is better off without tariffs, you will have difficulty defending that view. With unmitigated market share grabs by foreign players, entire domestic industries can be lost, leading to total foreign domination. At that point, cost is no longer low, and if it is, the reason is scale and advanced development that could have also happened at home, had a particular industry survived there. Here is what Tim Cook had to say on the subject:
"There’s a confusion about China. The popular conception is that companies come to China because of low labor cost. I’m not sure what part of China they go to, but the truth is China stopped being the low-labor-cost country many years ago. And that is not the reason to come to China from a supply point of view. The reason is because of the skill, and the quantity of skill in one location and the type of skill it is.
The products we do require really advanced tooling, and the precision that you have to have, the tooling and working with the materials that we do are state of the art. And the tooling skill is very deep here. In the U.S., you could have a meeting of tooling engineers and I’m not sure we could fill the room. In China, you could fill multiple football fields."
Consumers in the US may or may not be better off now, but think of all the people who could have had jobs building phones in the US. More jobs and job choices are better than fewer jobs and choices.
If you have doubts, one way of evaluating something is taking it to completion. What if nothing was made in the US - would we all be better off? Even if this resulted in abundance of cheap foreign goods, what would we do to earn the money to buy them?
Well the good news is we are about to find out who is right. If tariffs are good, the economy will grow quickly as manufacturers will start building factories and existing factories will start hiring more workers. The US economy will expand, prices will drop, and salaries will increase.
I'm not holding my breath.
I'd love to see a definitive scenario play out, but likely you and I will both be right and wrong. If tariffs work as a negotiating tactic and are scaled back once better trade terms are secured, I'll be right. If negotiations fail and the tariffs were done incorrectly (they should probably be more measured and selective than the way they were just enacted), you will be right. If the tariffs were done more strategically, it would be a good thing either way...
Thinking about it some more... Yes, tariffs seem like a drag during peacetime. But... If you want peace, prepare for war. Tariffs are like an insurance for wartime - a country cannot have an effective war effort if, instead of reconfiguring or ramping up certain industries, it now has to build them from scratch.
So, certain industries vital to national security must be protected with tariffs and subsidies. Food production, heavy machinery, electronics, steel, chemical... To be ready for something inevitable in principle but uncertain in timing.
What are your thoughts on reciprocal tariffs that Trump has enacted today?
The next two posts will be about just that.